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Upcoming Report Card – Baidu The Google Of China

October 29, 2014 | About:

For many years China has remained a forbidden kingdom for the western internet honchos and their indigenous companies like Alibaba (NYSE:BABA) and Baidu (NASDAQ:BIDU) has risen to threatening heights at par with their western competitors.

Baidu, the largest Chinese search engine company or popularly known as the Google (NASDAQ:GOOG) of China, is about to declare its Quarter 3 2014 results today post market closure. Let us take a look at what can be the likely results on its report cards. Conventionally companies reporting after market closes reports a down trending report but whether the same holds true for Baidu let us try to find that out here.

The Q3 estimates

According to street expectations, Baidu’s revenue is expected to grow at the rate of 54.5% year on year to around $2.5 billion in Q3 2014 going by the management guidance and a tat above the Wall Street estimates of $2.22 billion steered by strong revenue growth in the per online marketing customer since Q3 2013. Though gross margins as per market buzz are likely to decline marginally by about 0.2% to 61.9% from 62.1% from its previous quarter due to increased traffic acquisition cost as a percentage of its total revenue.

Going by the management guidance of Q2 2014 it stated that they will continue to spend in an accelerated manner in sales and marketing, related to mobile products, LBS, security products and their international efforts. Going by the previous management guidance the expense figures are slated to rise to 18.4% of total revenue against 17.9% of last quarter, due to increased spending on sales and marketing though spending in research and development is expected to at the same level as before at 14.5% of total revenue. As a result analysts speculate Baidu’s net income to stand at $0.65 billion and diluted earnings per share of $1.85 in Q3 culminating to a year on year growth of 31%.

Baidu’s equations to watch out for

With a paradigm shift in internet usage across the world from desktops to more mobile units and Chinese users being no different from the rest of the world, the major focus this quarter would be on revenue generated from mobile usage of Baidu. In fact Baidu’s success can be fathomed by finding out its percentage revenue from mobile operation as a part of its total revenue. In the Q1 2014 earnings call, CEO Robin Li had stated that “he expected mobile traffic to surpass PC traffic sometime this year. As mobile becomes an increasingly larger portion of total traffic, it's important for Baidu to ramp up mobile monetization.” Baidu’s share in the last 12 months had moved northwards by 40% owing to its strong mobile revenue generated by the ever increasing mobile internet traffic.

During the period, the company's mobile revenue contribution increased rapidly from 10% in Q2 2013 to 20% in Q4 2013 and 30% in Q2 2014, according to management's comments during the last earnings calls. This trend would certainly be a pleasing fact for the investors as they are aware of the usage movement from desktop PCs to mobile devices, and Baidu is successfully moving in the direction the world is moving, thus ensuring healthy returns and prospects for its investors.

The mobile revenue generation matrix of Baidu would be a key driver to look for in the Q3 earnings report since, if the uptrend in the mobile segment continues, then it would be worth improvising our position in the company as investors since the mobile segment will remain in vogue for quite a long time thus generating more mobile traffic.

Mobile cost-per-click for Baidu

This is where Baidu earns on its B2B segment from the advertisers on per click basis on mobile devices. The gap between mobile and PC cost per click (CPC) would also serve as an important indicator of Baidu's success rate in monetizing its mobile traffic. If the gap narrows or if it widens with the mobile traffic taking the upper hand, it would mean that Baidu has successfully been able to promote its mobile usage in keeping with the global trend. In the last quarter, bridging this gap has been talked about in details, and it would be another key point to watch for in today’s reports.

In all the last three calls Baidu has held year-to-date, Wall Street analysts have repeatedly asked Baidu’s management to provide updates on the gap. During the Q4 2013 call, CEO Robin Li said that “mobile CPC was about 60% of PC CPC, up from 55% in Q3 2013.” On the Q1 2014 call, he said, "The CPC gap between mobile and PC is continuously narrowing. All of the metrics we track for mobile monetization have been trending higher. So mobile traffic is growing rapidly, but mobile monetization is growing even faster." In the last quarter earnings call, he pointed out that mobile CPC continued its uptrend, though it had not surpassed that of desktops. He had also expressed optimism about mobile monetization's future based on the postulate that "people are increasingly moving from desktop PCs to mobile communication devices; hence the conversion mix in this category would be better."

Conclusion

So far so good. We feel that the result will be a mix bag since the mobile revenue contribution will follow an uptrend owing to Baidu’s continuous efforts to focus on mobile users; however it can be partially offset by the enhanced expenditure in the sales and marketing operations. Hence even if the revenue numbers might look attractive but the earnings and profit margins might look a bit murkier. For long term investors this should serve as an opportunity to gain more position as the company is in pace with the current market trends of mobile internet usage and thus should yield better number mix and profits in the near future as well. On this note let us keep a close watch on the report card of Baidu for Q3 which is about to come up shortly.

About the author:

reports.droy
We are a group of analysts exploring and analyzing different domains of business and writing reviews based on information available in public domain web portals. We do not hold any stock or investment position in any of the companies that we write for.

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